Financial Planning and Tax Minimization in Retirement
You have been very fortunate, and you are able to retire in relatively good shape. Although you no longer have employment income, the savings and registered retirement plans you built up while you did continue to grow even as you start taking income. The financial planning focus of building capital should now shift to managing your financial resources as you take the necessary income for retirement. Managing your expenses, including the taxes you pay, becomes of paramount importance.
For you to be financially comfortable in your retirement here are some of the items which need to be considered in this new chapter in your life.
Pay off Mortgage Debt
Hopefully, you were able to pay off the mortgage on your home before you retired. If you did not there should now be a priority to pay that off as soon as you can. If it is appropriate, consider down-sizing for your new retirement lifestyle. This could allow you to live mortgage free in your retirement years. If this is not desirable there are some options to allow you to pay off your mortgage more quickly. Prior to retirement perhaps explore your options in refinancing your mortgage to give you reduced payments and possibly even lower interest costs.
Try to make biweekly payments, if you are able, to shorten the amortization period. Many mortgages also have the option of making extra principal payments so try to take advantage of that if possible.
Manage your Debt Obligations
Living on a lower or fixed income, is not the time to be paying high rates of interest on your debt. Reduce your use of credit cards by paying with cash or debit transactions. If you must use your Visa or other such cards, try to pay the balance in full before the interest kicks in. If you need to make a major purchase many credit cards now give you the option of lower interest, installment transactions.
If you have a concern with the amount of your credit card or other debt consult with your banker or financial advisor as to how to beneficially consolidate your debts. In any event, make sure you track all of your bills and pay them on time to avoid any unnecessary penalties.
Review Pension Arrangements
If you are a member of an employer sponsored pension plan make sure you discuss prior to retiring as to what income option suits you best. Do you need survivor benefits for your spouse? Should your income be adjusted for inflation? Remember each option has a direct impact on the amount of pension income so best to establish which one best meets your needs.
People are living longer today, so we really don’t know how long our retirement funds are to last. If you don’t have a company pension plan your retirement funds probably consist of your registered plans being converted into a Registered Retirement Income Fund (RRIF). If you can, try and take not much more than the minimum mandatory withdrawal each year to preserve it as long as possible. If you still would rather have a guaranteed monthly income payable for the rest of your life, consider a life annuity.
Living off Savings
Hopefully, during your working life you also saved and invested money in non-registered retirement plans. These could include stocks, bond, mutual funds or real estate. Remember that you don’t pay income tax on the full amount you withdraw from these assets like you do with a registered plan.
Look to any assets that you own but no longer need to increase your retirement fund. For example, that second car could be sold, and the proceeds re-invested into something that increases in value. They could also be used to reduce any existing mortgage or debts that burden your cash flow.
Reduce Income Tax
If you are under the age of 71 and still have earned income or if you have contribution room in your RRSP, consider making tax-deductible contributions. This will not only reduce the income taxes you pay this year, but also increase your funds for the future.
If you don’t require it financially, consider delaying the start of your Canada Pension Plan income until age 70. In fact, if you have adequate non-registered savings consider using those funds to bridge all of your pension income including your RRSP until age 70 as well.
Talk with your financial advisor or accountant to understand the options of reducing income tax in retirement.
Stay on Budget
Chances are your income will reduce upon retirement. It is prudent to prepare a budget reflecting your new income level. Try to stay on budget. Look for ways to reduce costs such as taking advantage of senior or other discounts you might be eligible for. Make sure you apply for the increased homeowners grant each year.
Review your Life Insurance
Before you cancel any life insurance make sure you still don’t need it. Life insurance is used for older individuals and couples to leave a legacy for their children or charity as well as reducing any debt that really shouldn’t be left for the children to pay. It is also very effective in the estate planning process to pay any income taxes that are deferred until your death (e.g. capital gains).
Make Sure Health Insurance is Adequate
Review the health insurance that you maintain to reduce the cost of those items which are not covered by your provincial plan. These include, massage, physiotherapy, podiatry etc.
Consider purchasing long-term care insurance. Should the day come that you might no longer be able to adequately care for yourself without assistance these plans eliminate or greatly reduce the cost of such care relieving your family of that burden.
The objectives of estate planning are to organize one’s assets to allow for the orderly transition to your spouse or the next generation with a minimum of cost, taxes and anxiety. The foundation of any estate plan is the Last Will and Testament. The will names an executor who is responsible for paying all the just debts of the testator and making sure his or her wishes are carried out.
If you do not have a will or if it is not current, now is the perfect time to draft one.
Draft a Representation Agreement
Just as a Will, appoints an executor who is tasked with making sure the testator’s wishes are carried out when he or she dies, a Representation Agreement (also referred to as a Living Will), appoints a representative or power of attorney to act for the individual if he or she becomes incapacitated or incognitive. This includes all financial matters as well those involving medical care.
Work with an Experienced Financial Advisor
Planning for retirement is complicated, but it becomes easier to execute if you work with a proactive and sincere financial advisor. Accureta Wealth Management, iA Private Wealth, is dedicated to ensuring that all Canadians live a meaningful and vibrant lifestyle while saving for a comfortable retirement. Contact us for guidance on how we can help with tax minimization, estate, financial, and retirement planning.